ACIT, CENTRAL CIRCLE-1, THANE, THANE V. NAKUL MARKHEDKAR, THANE

ITA 785/MUM/2025

AI Insights

The case involves appeals by the Revenue against the orders of the Commissioner of Income Tax (Appeals) which deleted the additions made by the Assessing Officer under section 56(2)(vii)(c) of the Income Tax Act, 1961. The additions were related to the alleged undervaluation of shares acquired by the assessee, Nakul Markhedkar, in M/s Ratangiri Financial Advisory Pvt Ltd (RFAPL) through its holding companies. The Revenue contended that the transaction was a sham to evade taxes, as the shares were acquired at a nominal value compared to their fair market value. However, the CIT(A) found that the AO had misapplied Rule 11UA in determining the fair market value for the relevant assessment years, leading to the deletion of the additions. The Tribunal agreed with the CIT(A)'s decision, emphasizing the incorrect application of the law by the AO.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 312420 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2016-2017
• Other Referred Cases: PCIT vs. Minda SM Technocast Pvt. Ltd., Smiti Holding & Trading Company Pvt. Ltd. vs. PCIT, McDowell and Company Ltd. vs. Commercial Tax Officer, Vodafone International Holdings V.B. vs. Union of India & Anr., Killick Nizon Limited vs. DCIT
• Laws Referred To: Income Tax Act, 1961, Income Tax Rules, 1962
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: VIJAY MEHTA; RAKESH RANJAN; PURCHASING SHARES OF MS FARISTA
• Keywords: Depreciation; Fair market value; Cost of acquisition; Valuation report; Bogus
• Section: 143(3); 56; 132; 153A; 131; 56(2)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, VP & MS PADMAVATHY S, AM I.T.A. No.786/Mum/2025 (Assessment Year: 2015-16) I.T.A. No.785/Mum/2025 (Assessment Year: 2016-17) ACIT, Central Circle-1, Room No.10, 6th Floor, A-Wing, Ashar I.T. Park, Road No. 16Z, Wagle Estate, Thane (West), Maharashtra. Vs. Nakul Markhedkar, 1905, Drewberry, Kolshet Road, Everest World, Thane (West), Maharashtra -400604. PAN: CPQM1819G Appellant) : Respondent) Appellant /Assessee by : Shri Vijay Mehta, AR Revenue / Respondent by : Shri Rakesh Ranjan - Sr. DR Date of Hearing : 22.04.2025 Date of Pronouncement : 30.04.2025 O R D E R Per Padmavathy S, AM: These appeals by the Revenue are against the separate orders of the Commissioner of Income Tax (Appeals)-11, Pune [In short 'CIT(A)'] both dated 08.11.2024 for AY 2015-16 & 2016-17. The common issue contended by the revenue in both the appeals pertain to the CIT(A) deleting the addition made by the 2 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar AO under section 56(2)(vii)(c) of the Income Tax Act, 1961 (the Act) by applying Rule 11UA of the Income Tax Rules, 1962 (the Rules). 2. For the purpose of adjudication, we will consider the revenue's appeal for AY 2015-16 as the lead case. The assessee is an individual and has not filed the original return of income for AY 2015-16. There was a search & seizure action under section 132 of the Act on 24.03.2021 on M/s Vikram Group which is engaged in the business of procuring and setting up power transmission and distribution lines on contract basis and assessee is included in the search operation. The Assessing Officer (AO) issued a notice under section 153A of the Act and in response the assessee filed the return for AY 2015-16 on 11.12.2021 declaring a total income of Rs. 1,25,000/-. During the proceedings the AO held that the assessee has indirectly acquired the shares of M/s Ratangiri Financial Advisory Pvt. Ltd (RFAPL) by purchasing shares of the holding companies of RFAPL Viz., M/s Farista Financial Consultants Pvt Limited and M/s Deb Suppliers & Traders Pvt Limited. The AO was of the view that the by acquiring the shares of the M/s Farista Financial Consultants Pvt Limited for a consideration the assessee has acquired the shares of RFAPL at a price which is lower than the Fair Market Value (FMV) of the shares of RFAPL. The allegations of the AO as summarised by the CIT(A) is extracted below – “6.1 Shares of M/s Ratnagiri Financial Advisory Pvt Limited (now known as M/s Vikran Engineering & Exim Pvt Limited) was acquired by M/s Vikran Group by purchasing shares of its holding companies through the assessee and other family members. 6.2 M/s Ratnagiri Financial Advisory Pvt Limited (RFAPL) was incorporated on 04.06.2008 at Kolkata with the total share capital of Rs. 1,00,000/-. There was a change of promoters on 10.07.2008. The new promoters on 31.03.2009 ---raised further share capital of Rs. 28,03,780/- along with share premium of Rs. 13,73,85,220/- by issuing shares @ 500/- per share (Face value of Rs. 10 + premium of Rs. 490 per share). The AO has observed that the said company did 3 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar not have any significant business activity during FY 2008-09 justifying the share premium of Rs. 490/- per share. As per assessing officer, the share capital of Rs. 14.02 crores was raised from shell companies being operated by accommodation entry operators in Kolkata. 6.3 Subsequently, on 31.03.2011, a total number of 1,44,430 shares of RFAPL were acquired by M/s Farista Financial Consultants Pvt Limited and 1,44,948 shares of RFAPL were acquired by M/s Deb Suppliers & Traders Pvt Limited for nominal amounts. As per assessing officers, these two companies were also operated by accommodation entry operator namely Shri Anand Sharma. 6.4 In the month of December, 2014, the shareholding pattern of M/s RFAPL was as under: Sl. No. Name of shareholder No. of shares held 1. M/s Farista Fina Pvt Ltdncial Consultants Pvt Ltd 1,44,430 2. M/s Deb Suppliers & Traders Pvt Ltd 1,44,948 3. M/s Naina Devi Commerce Total no. of shares 2,90,378 6.5 As per assessment order, the total number of shares issued by M/s Farista Financial Consultant Pvt Limited were 10,000 and these shares were held by Shri Abhinash Sharma (5000 shares) and Shri Suresh Sharma (5000 shares). Similarly, the total number of shares issued by M/s Deb Suppliers and Traders Pvt Limited were 10,000 and these shares were held by Ms. Amita Joshi (5000 shares) and Ms. Sunaina Agarwal (5000 shares). 6.6 The assessee and her family members acquired the company namely M/s Ratangiri Financial Advisory Pvt Ltd in the month of December 2014 by acquiring the entire shares of its holding companies namely M/s Farista Financial Consultants Pvt Limited and M/s Deb Suppliers & Traders Pvt. Limited. As per assessee's submission filed during the assessment proceedings, M/s RFAPL was acquired in the following manner. 4 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar 6.7 The assessing officer, therefore, observed that the Vikran Group acquired the company RFAPL by paying only Rs. 7,00,000/- although the said company had share capital including share premium of Rs. 14.02 crores. The assessing officer noticed that on the date of transfer, the FMV of the shares of M/s RFAPL as per Rule 11UA was Rs. 482.98 and the assessee by purchasing shares of M/s Farista Financial Consultants, had indirectly acquired 72,215 shares of RFAPL by paying only a sum of Rs. 50,000/-. Therefore, a show-cause notice was issued to the assessee asking her to explain as to why an addition u/s 56(2)(vii) (c) of the Act should not be made by taking the FMV of RFAPL at Rs. 483/- per share. 6.8 In response to this show-cause notice, the appellant submitted that he had purchased shares of M/s Farista Financial Consultants Pvt Limited and he did not purchase any share of RFAPL. It was also submitted that as per Rule 11UA of IT Rules, the FMV of shares of M/s Farista Financial was Rs. 7.67 per share. The appellant submitted that as per Rule 11UA applicable for AY 2015-16, the FMV of unquoted shares, is required to be arrived at by using 'book value of assets' and not on the basis of the 'FMV of underlying assets'. Since, the shares of M/s Farista Financial Consultants Pvt Limited, were purchased at face value i.e. 5 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar Rs. 10 per share, which is more than the FMV as per Rule 11UA, no addition u/s 56(2)(vii) (c) of the Act can be made. The assessee also filed the copies of Valuation Reportfor FMV of shares of M/s Farista Financial. 6.9 On receipt of above submission, the assessing officer examined the material collected by the investigation wing, Kolkata and observed that M/s Ratangiri Financial Advisory Pvt Limited, M/s Deb Suppliers & Traders Pvt Limited, M/s Farista Financial Consultants Pvt Limited as well as the 22 investor companies who invested Rs. 14.02 crores in M/s Ratangiri Financial on 31.03.2009 were shell companies being operated by Shri Anand Sharma, an accommodation entry operator. Detailed discussion on this issue has been made by the assessing officer in the assessment order which is not being repeated for the sake of brevity. 6.10 After analysing the material available with him, the assessing officer at page 29 of the assessment order, has recorded the following conclusion: In view of the above facts and findings, the share capital & premium amounting to Rs.14.03 crores raised by M/s. Ratangiri Financial Advisory Pvt Ltd is clearly found to be non-genuine and it is a shell concern operated by Shri Anand Sharma. Thus, the source of Share Capital and premium of Rs.14.03 crores of M/s. Ratangiri Financial Advisory Pvt Ltd which was later acquired by M/s. Vikran Group is found to be non-genuine 6.11 Thereafter, the assessing officer has recorded his conclusion as under. 1. The assessee submitted that purchase value was determined as per the valuation report certified by the Chartered Accountant enclosed as Annexure- 1. On the analysis of the same, it was found that the holding companies did not have any business and the sole purpose of acquiring the holding companies was to acquire M/s. Ratangiri Financial Advisory Pvt Ltd. 2. It is pertinent to note that Shri Rakesh Markhedkar has acquired 1000 shares of M/s. Ratangiri Financial Advisory Pvt at Rs.500/- per share, whereas while acquiring the same shares through the holding companies, the assessee wants to consider the FMV of shares of holding companies. It is like when you purchase a single gold coin you are paying Rs.500/- but when you are purchasing the entire Pot of Gold coins you are paying price of the Pot only, ignoring the value and price of the Gold coins. Hence, it is clear that the shares of holding companies have been purchased by assessee at Face Value in exchange of cash equivalent to share capital of Ratangiri Financial Advisory Pvt Ltd. 6 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar 3. Also, the fact that Shri Nakul Rakesh Markhedkar and Smt. Kanchan Rakesh Markhedkar of M/s. Vikran Group were made directors in M/s. Ratangiri Financial Advisory Pvt Ltd on 18.11.2014 prior to acquisition and Shri Rakesh Ashok Markehdkar and Shri Avinash Ashok Markhedkar were made directors on 02.11.2015 after acquisition makes it very clear that the purpose of acquisition of holding companies was solely to acquire total control over M/s. Ratangirni Financial Advisory Pvt Ltd. 4. It is pertinent to note that after acquisition of M/s. Ratangiri Financial Advisory Pvt Ltd the assessee has rechristened it as M/s. Vikran Engineering & Exim Pvt Ltd and it has been made the Flagship concern of M/s. Vikran Group for conducting its business as EPC contractor, which makes it very clear that acquisition of holding companies was arranged only to circumvent the provisions of section 56(2)(vii) (c) of the I.T.Act, 1961. 5. The assessee has failed to explain satisfactorily the source of capital Rs. 14.03 crores raised by M/s. Ratangiri Financial Advisory Pvt Ltd and is clearly raised through proven shell concerns as discussed above. 6. The assessee has failed to explain as to how the shares of M/s. Ratangin Financial Advisory Pvt Ltd have been acquired for Rs.2 lacs by his family members when it had capital of Rs.14.03 crores and the FMV of each share as per Valuation report submitted by the assessee, placed on record, was Rs.482.98/- per share. 7. As per Section 56(2) (vii)(c) of the Income Tax Act 1961 where an individual receives any property for a consideration which is less than the FMV of the property. the difference shall be assessed as income of the recipient. 8. In the instant case the directors of M/s Vikran Group viz Smt Kanchan Markhedkar, Shri Nakul Markhedkar, Shri Vipul Markhedkar have acquired the shares of M/s Ratangiri Finacial Advisory Pvt. Limited for a value which is less than the Fair Market Value Rs 483/- per share of M/s Ratangiri Financial Advisory Pvt. Limited as per the valuation report provided by the assesse in his statement recorded u/s 131 on 28.05.2021. 9 Hence the acquisition of shares of M/s. Ratangiri Financial Advisory Pvt Ltd by Smt Kanchan Markhedkar, Shri Nakul Markhedkar, Shri Vipul Markhedkar made below FMV Rs 483/- attracts the provisions of S.56(2) (vii) (c) of the 1. T.Act, 1961. This is a complete a \"Sham Transaction\" as per law: 7 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar A sham transaction is a business deal entered into parties for the purpose of deception, like to escape a tax liability or in other words, simply to avoid paying tax. For detecting whether a deal is sham transaction, we can apply two-fold test of which the first one checks whether the transaction has any economic interest other than availing tax benefit, which is actually the \"objective test\" and second one checks whether the transaction has any business purpose other than availing a tax benefit, which is the \"subjective test\". 1. The assessee's transaction failed in both the tests. The assessee's transaction does not have either any economic interest or any business purpose. Thus, assessee used \"colorable devise such as sham transaction to avoid the taxes. This is clearly treated as tax evasion. 2. These are the transactions which do not have any substantial commercial purpose other than obtaining tax benefit or tax evasion. The basic criteria for determining whether an arrangement lacks commercial substance or not are the period or time for which the arrangement exists, the fact that an exit route is provided by the arrangement etc. 3. On perusal of this, the transactions entered by the assessee clearly lack commercial substance. Hence, it is a sham transaction. 6.12 While reaching to the above conclusion, the assessing officer relied on following case-laws: McDowell and Company Ltd., vs. Commercial Tax Officer, 154 ITR 148 (SC) The judgement of Hon'ble Supreme Court in the case of Jiyajee Rao (SC). Vodafone International Holdings V.B. vs. Union of India & Anr. (SC). Killick Nizon Limited vs. DCIT (Bombay HC) dated 06 March 2012. 6.13 Finally, the assessing officer made an addition of Rs. 3,48,29,845 by observing as under: In view of the above, it is clear that the whole transaction is a sham transaction and is a clear arrangement to evade the taxes. By paying Rs. 2,00,000/- and purchasing equity of holding company, the company has indirectly acquired the subsidiary company with share capital worth Rs. 14 crores. So the basic intention of the assessee was always to purchase subsidiary with such huge share capital but has paid price only for share capital of holding company. Therefore, this is a fit case where in substance over form is to be looked which clearly 8 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar proves that the entire transaction is carried out to evade tax. Further, for the purpose of computation of tax liability section 56(2)(vii) (c) is invoked. Accordingly, the differential amount between total FMV of Shares of M/s. Ratangiri Financial Advisory Pvt Ltd worked out @Rs.483 per share and the cost of acquisition paid by M/s. Vikran Group is taxable u/s.56(2)(vii) (c) of the IT Act, 1961 in the hands of each shareholder for AY 2015-16. The working of the income arising on acquisition of Share of M/s. Ratangiri Financial Advisory Pvt Ltd is given below: Working of Income u/s 56(2) (vii) (c) of the IT Act, 1961 r.w. Rule 11UA on acquisition of Shares of M/s. Ratangiri Financial Advisory Pvt Ltd by M/s. Vikran Group on 05.12.2014 Name of Person who acquire d indirect control Shares of RFAPL Number Shares of RFAPL Acquired indirectly through holding companie s Total Value of such Shares of RFAPL acquired @483 Rs. per share Cost incurred indirectl y for acquisiti on of such Shares of RFAPL in Rs. Excess of FMV gained in Rs. Nakul Markhe dkar 72,215 3,48,79,845 50,000 3,48,29,845 Total 72,215 3,48,79,845 50,000 3,48,29,845 Total income chargeable u/s.56(2) (vii) (c) r.w. Rule 11UA 3,48,29,845 Thus, the amount of Rs. 3,48,29,845/- is taxable u/s 56(2)(vii) (c) of the IT Act, 1961 read with Rule 11UA in the hands of the assessee.” 3. Accordingly, the AO made an addition of Rs. 3,48,29,845/- under section 56(2)(vii)(c) of the Act r.w.r. 11UA of the Rules while completing the assessment under section 143(3) r.w.s 153A. On further appeal, the CIT(A) deleted the addition made by the AO on the ground that the AO while applying Rule 11UA for arriving 9 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar at the FMV of shares of M/s Farista Financial Consultants Pvt Limited has considered the FMV of the underlying asset i.e. the FMV of RFAPL shares at Rs.483 whereas the Rule 11UA as applicable for AY 2015-16 the value of underlying asset should be considered at book value. Accordingly the CIT(A) held that the addition made by the AO is to be deleted. The CIT(A) has also given a detailed finding with regard to each of AO's allegations that the entire transaction is sham. The revenue is in appeal against the order of the CIT(A). 4. The ld. DR placed heavy reliance on the findings of the AO with regard to how the entire transaction of acquisition of shares in M/s Farista Financial Consultants Pvt Limited by the assessee at nominal value of Rs.10 is a colourable device to acquire the shares of RFAPL whose shares as per FMV is worth Rs.483/- per share. The ld. DR in this regard submitted that since the impugned transaction is a sham, the CIT(A) is not correct in deleting the addition merely on the ground that rule 11UA has been incorrectly applied. The ld DR accordingly prayed that the AO's order may be upheld. 5. The ld. AR on the other hand submitted that the limited ground on which the CIT(A) has given relief to the assessee is that the amendment to Rule 11UA which has been applied by the AO is applicable only from AY 2018-19 and not for the year under consideration. The ld. AR in support of this proposition placed reliance on the decision of the Hon'ble Delhi High Court in the case of PCIT vs. Minda SM Technocast Pvt. Ltd. [2023] 155 taxmann.com 548 (Del.) and on the decision of the Co-ordinate Bench in the case of Smiti Holding & Trading Company Pvt. Ltd. vs. PCIT [2018] 99 taxmann.com 157 (Mum. Trib.). 6. We heard the parties and perused the material on record. From the finding of the AO which is extracted in the earlier part of this order, we notice that the AO has 10 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar invoked the provisions of section 56(2)(vii)(c) r.w.r 11UA for the reason that the acquisition of shares by the assessee in M/s Farista Financial Consultants Pvt Limited is to indirectly acquire the shares in RFAPL at a nominal value of Rs.10 where the FMV of the shares of RFAPL is Rs.483 per share. Therefore the AO held the entire transaction to be a sham transaction and accordingly made an addition under section 56(2)(vii)(c) r.w.r.11UA towards the difference between Rs.483 per share and the value of acquisition @ Rs.10 per share by the assessee. It is also relevant to mention here that the number of shares acquired by the assessee in M/s Farista Financial Consultants Pvt Limited is 5000 shares whereas the AO while making the addition has considered the number of shares to 72,215. This assumption it is noticed that the total number of shares owned by M/s Farista Financial Consultants Pvt Limited in RFAPL is 1,44,430 and since the assessee has acquired 50% of shares in M/s Farista Financial Consultants Pvt Limited the AO has assumed that the assessee has acquired 50% of shares i.e. 72,215 shares in RFAPL. From this it is clear that the AO has not only considered the FMV value per share of the underlying asset in the books of M/s Farista Financial Consultants Pvt Limited but has also considered the number of shares alleged to be indirectly acquired by the assessee. Therefore the point of dispute is what should be the value of underlying assets that has to be considered while arriving at the FMV of the shares of M/s Farista Financial Consultants Pvt Limited as per Rule 11UA of the Rules. The relevant rules applicable for AY 2015-16 is extracted below – Determination of fair market value. 11UA. (1) For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,— (a) & (b) ****** (c) valuation of shares and securities,— (a) ***** [(b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the 11 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar following manner, namely:— the fair market value of unquoted equity shares = (A - L) × (PV)/(PE), where, A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- (1) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on pref erence shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance-sheet; PV = the paid up value of such equity shares;] 7. From the plain reading of the above rule which is applicable for the year under consideration it is clear that for the purpose of determining the FMV of the unquoted shares, the underlying asset including assets in the form of shares are to be valued at book value as appearing in the Balance Sheet. This provision of 12 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar considering the value of underlying asset being shares is amended w.e.f. 01.04.2018 to provide that the value of the underlying asset being shares need to be considered at FMV as determined in the manner provided in rule 11UA and not the book value as per Balance Sheet. 8. In assessee's case, on perusal of the AO's order we notice that the AO himself has arrived at the FMV of the value of shares of M/s.Farista Financial Consultants Pvt. Ltd. at Rs.7.67 per share taking the value of assets including shares of RFAPL at book value (refer page 6 of AO's order). However the AO for the purpose of making addition under section 56(2)(vii)(c) has considered the FMV of the RAFPL shares thereby valuing the underlying assets of M/s.Farista Financial Consultants Pvt. Ltd. at FMV which is applicable only from 01.04.2018. In this regard we notice that the Hon'ble Delhi High Court while considering the applicability of amended provisions of Rule 11UA has held that “6.1 It is also not in dispute that the respondent/assessee had submitted the valuation report of a Chartered Accountant (CA), which had pegged the value of the subject shares at Rs. 4.96 per share. 7. Concededly, the CA, in arriving at the value of the subject shares, which, as indicated above was pegged as Rs. 5/- per share by the respondent/assessee, had taken recourse to Rule 11UA of the Income-tax Rules, 1962 [in short, \"1962 Rules\") as applicable in the period in issue, le., AY 2014-15 8. The AO had valued the subject shares at Rs. 45.72 per share, albeit, by taking into account Rule 11UA of 1962 Rules, which was operable on the date when the order was passed. 9. The difference in the value arrived at by the AO and that which the respondent/assessee had fixed qua the said shares, was the amount which was added to the income of the respondent/assessee. The difference per share was Rs. 40.72 [Le., Rs. 45.72 per share - Rs. 5/- per share). 10. It is this difference that led to the addition of Rs. 11,84,46,336/- to the income of the respondent/assessee. 13 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar 11. The record shows, and something which is not in dispute, that in the AY in issue, ie., AY 2014-15, the formula which obtained under Rule 11UA of 1962 Rules required calculation of the fair market value, inter alia, by taking into account the book value of the assets shown in the balance shert. The relevant part of Rule 11UA is extracted hereafter: \"Determination of fair market value. 11UA.[(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,- (a) & (b) ** ** (c) valuation of shares and securities,- (a) ** ** [(b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:- the fair market value of unquoted equity shares = (A-L) x (PV), (PE), Where, A book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L= book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- (1) the paid-up capital in respect of equity shares; 14 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company: (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;\" [Emphasis is ours 12. It is not in dispute that the formula prescribed in Rule 11UA of the 1962 Rules underwent a change, which resulted in the fair market value of unquoted shares being calculated by, inter alia, taking into account, inter alia, the value of assets such as immovable property, which was adopted by \"any authority of the government\" for the purposes of payment of stamp duty. After the said change became effective, i.e., from 1-4-2018, Rule 11UA read as follows: \"Determination of fair market value. 11UA. (1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,- (a) & (b) ** ** (c) valuation of shares and securities,- (a)** [(b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:- 15 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar the fair market value of unquoted equity shares (A+B+C+D-L)x (PV)/(PE), where, A = book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet as reduced by.- (1) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any, and (ii) any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; B= the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; C= fair market value of shares and securities as determined in the manner provided in this rule, D= the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property; L= book value of liabilities shown in the balance sheet, but not including the following amounts, namely: (1) the paid-up capital in respect of equity shares, (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company, (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities, 16 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;\" [Emphasis is ours] 13. In other words, if immovable property, such as land, had to be taken into account in arriving at the Fair Market Value of unquoted shares by adopting the formula prescribed in Rule 11UA of 1962 Rules we.f. 1-4-2018, i.e., AY 2018-19, the AO would have to factor in the value of such land, by taking into account the circle rate prevailing in the area. 14. It is this error which the AO committed, ie., applying the formula contained in Rule 11UA of 1962 Rules, which was not applicable to the AY in issue, ie., 2014-15” 9. We further notice that a similar view has been held by the Co-ordinate Bench in the case of Smiti Holding & Trading Company Pvt. Ltd. (supra) where it has been held that “6.1 A similar issue arose in Minda SM Technocast (P.) Ltd. (supra). The AY is 2014-15. The facts are that the assessee had acquired shares of M/s. Tuff Engineering Pvt. Ltd. (in short TEPL') at Rs. 5 per share. The shares were acquired by the assessee from three companies. The assessee claimed to have valued the shares of TEPL as per the provisions of Rule 11UA and filed a copy of the report prepared by the Chartered Accountants in support of its claim to justify the price of shares at which these were required. However, the AO was of the view that the assets declared by TEPL in its balance sheet should have been valued as per the circle rate while determining the value of shares acquired by the assessee. Accordingly, the AO determined the value of shares at Rs. 45.72 per share of TEPL and treated the difference of Rs. 40.72 as income from other sources under section 56(2)(viia) of the Act. The view taken by the AD was subsequently confirmed by the Id. CIT (A). In appeal, the Tribunal vide order dated 07.03.2018 held: \"6.4 On the plain reading of above Rule, it is revealed that while valuing the shares the book value of the assets and liabilities declared by the TEPL should be taken into consideration. There is no whisper under the provision of 11UA of the Rules to refer the fair market value of the land as taken by the Assessing Officer as applicable to the year under consideration. Therefore, we are of the view that the share price calculated by the assessee of TEPL for Rs. 5 per shares has been determined in accordance with the provision of Rule 11UA. In holding so, 17 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar we find support and guidance from the judgment relied by the learned Authorized Representative which has been discussed in the preceding paragraphs. Therefore, we have no hesitation in reversing the order of the lower authorities. Hence, the grounds of appeal of the assessee are allowed.\" 6.2 From the above, it is evident that Rule 11UA as in force in AY 2013-14 does not provide to replace fair value of quoted shares to book value and therefore, the value derived by the DCIT 4(1)(1) cannot be substituted to the value as derived under Rule 11UA. Rule 11UA, during the relevant period, provides for valuation of unquoted equity shares by adopting the amount as per book value.” 10. We find that the AO besides applying the incorrect Rule 11UA has also not followed the right way to calculate the addition to be made under section 56(2)(vii)(c). We notice that the AO has considered 50% of the total shares RAFPL held by M/s.Farista Financial Consultants Pvt. Ltd. and made the addition by taking the difference between FMV and the price paid by the assessee for acquiring shares of M/s.Farista Financial Consultants Pvt. Ltd. under section 56(2)(vii)(c). In our considered view the formula applied by the AO for making the addition is not as per the method provided under Rule 11UA which provides that FMV is to be worked at by applying the formula (A - L) × (PV)/(PE). The AO ought to have arrived at the FMV of the shares of M/s.Farista Financial Consultants Pvt. Ltd. by applying Rule 11UA for the relevant AY and if the FMV thus arrived is more than consideration paid by the assessee for obtaining the shares of M/s.Farista Financial Consultants Pvt. Ltd. then the difference should have been added under section 56(2)(vii)(c). The difference between the FMV of the shares RAFPL and the purchase consideration paid by the assessee for obtaining shares in M/s.Farista Financial Consultants Pvt. Ltd. which is added by the AO under section 56(2)(vii)(c) in our view does not fall within any method prescribed under the Act. It is also relevant to mention here that the AO while examining share value of 18 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar RAFPL which is alleged to be purchased by paper companies at a premium of Rs.490 has held that the premium is not substantiated since RAPFL is not carrying on any business and that the AO has recorded a detailed finding with respect each of the 22 companies who have purchased the shares of RAFPL. However the AO for the purpose of making addition under section 56(2)(vii)(c) in the hands of the assessee has arrived the FMV of RAFPL at Rs.483 by considering the alleged bogus premium into consideration as has been pointed out in the order of the CIT(A). 11. In view of these discussions and considering the facts unique in assessee's case we see no infirmity in the order of the CIT(A) in deleting the addition made under section 56(2)(vii)(c). 12. For AY 2016-17 the AO has made addition under section 56(2)(vii)(c) towards the shares purchased by the assessee in M/s. SarvapalikaVanikjya Pvt Ltd where the AO alleged that the assessee has indirectly obtained the shares in M/s. Bahar Vintrade Pvt Ltd the FMV value of which is at Rs.483. Similar to AY 2015- 16, though the AO himself has computed the FMV of the shares of M/s. SarvapalikaVanikjya Pvt Ltd at Rs.8.89 per share based on book value. However the addition is made by the AO considering the FMV value of the underlying asset i.e. shares of M/s. Bahar Vintrade Pvt Ltd. We have while considering the similar issue for AY 2015-16 held that the amended Rule 11UA where the FMV of underlying asset need to be considered for the purpose of section 56(2)(vii)(c) is applicable only from AY 2018-19. Therefore we see no reason to interfere with the decision of the CIT(A) in deleting the addition made under section 56(2)(vii)(c) for AY 2016-17 on ground that the AO has applied the Rule 11UA which is applicable only from AY 2018-19. 19 ITA Nos. 785 & 786/Mum/2025 Nakul Markhedkar 13. In result, the appeals of the revenue for AY 2015-16 & 2016-17 are dismissed. Order pronounced in the open court on 30-04-2025. Sd/- Sd/- (SAKTIJIT DEY) (PADMAVATHY S) Vice President Accountant Member *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai "